Diversify wisely: Cost cutting in oilfield services

Peru

Rodolfo Iglesias Barzon, Equipetrol general manager in Peru, discusses the importance for companies to diversify services in a slowing market. With more than 55 years of experience in the Andean region, Bolivia-based Equipetrol expanded to Peru in 2007, building a practice that concentrates on slickline and well testing services.

While Peru’s oil and gas industry has expanded since opening up to foreign operators two decades ago, in many ways it has remained a marginal market. Small upstream operators invest minor amounts of capital into developing high-cost oil in the Amazon, with low profit margins and no guaranteed profit.

Both the low profit margins and the complex logistics of operations in the rainforest introduce challenges for service companies, and some providers, such as Equipetrol, have concentrated on services such as slickline that offer advantages both in terms of cost and mobility.

SLICKLINE OR WIRELINE: In conventional oilfield development, as new wells are being drilled, progress can be monitored through wireline services, which involve inserting electric cables into the well.

Wirelines are used to retrieve, monitor and modify equipment in the well, but can also carry sensors that allow them to keep track of well data such as temperature, pressure, resistivity, conductivity and wellbore dimensions to ensure that the drilling is on track.

An alternative to wirelines is slicklines, which are single-strand, non-electric cables introduced into wells solely for the purpose of adjusting, placing and retrieving equipment such as valves, sleeves and plugs.

This alternative provides the same opportunities to monitor well and reservoir conditions. The lines are less expensive to operate and easier to transport to the location – considerably less supporting equipment and fewer personnel are required to conduct a slickline operation, cutting operating costs.

For these reasons, many operators in Peru have gone back to slickline, favouring the back-to-basics, cost-cutting approach provided by companies such as Equipetrol.

LONG-TERM ADVANTAGE: Even with more economical options such as slickline, the plummeting price of oil means that many of Peru’s oil reserves are simply no longer cost-efficient to develop, regardless of the technologies utilised. This has obvious ramifications for services companies, which see declining demand for their services and intensifying competition.

In this kind of market, the long-term advantage may lie with local services companies, which have an incentive to maintain a greater presence in their home markets, as opposed to internationals, which can profit more by refocusing their efforts elsewhere.

Naturally, the biggest advantage will lie with companies that already possess strong working relationships with the few upstream operators that are still developing their assets in the country.

EquiPetrol has been working with Canada’s Pacific Rubiales and Texas-headquartered BPZ Energy since 2007 on projects including the development of offshore block Z-1, one of the country’s most promising new developments, where production began in September 2014 from the Corvina CX15-7D well. More drilling activity in the block is expected in 2015.

DIVERSIFICATION: With this slowdown in the market, it makes little sense for companies to specialise in one particular line of services. Rather, providers offering the broadest possible array of services are more likely to receive contracts, given that operators can hire a single company for blanket contracts. This is a more economical option when compared to contracting with a series of independent specialists.

This trend away from specialisation is already visible in the marketplace, with EquiPetrol offering a wider range of services including surface well testing, fluids filtration, workover and pulling, artificial lift, high-pressure testing and bolting, and wellhead and valves servicing.

The demand for packaged services would seem to favour larger providers. However, smaller companies have been some of the most adventurous in expanding into services such as logistics and transportation, and can significantly undercut the bigger players in price.

QUALITY PROTECTION: This same tendency towards economic, low-cost options and service bundling has also led to a worrying trend towards lower-quality work, with some companies rapidly expanding into services where they have no experience and use obsolete technologies.

Particularly in the wireline and slickline sector, companies have seen their prices undercut by these new competitors using second-hand, rudimentary equipment to provide basic services at cut-rate prices.

Here, the burden falls on the operators to distinguish between qualified and cost-efficient options versus low-cost but dangerous amateurs. With a single mishap, they could risk the reputation of an entire industry.